THE LIBYAN OIL INDUSTRY: DEPENDENCE ON FOREIGN COMPANIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP06T00412R000504980001-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 25
• Document Creation Date: December 27, 2016
• Document Release Date: May 7, 2012
• Sequence Number: 1
• Publication Date: January 1, 1986
• Content Type: REPORT

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Directorate o~
ILLEGIB
Secret
Intelligence 25X1
Dependence on
Foreign Companies
The Libyan Oil Industry:
An Intelligence Assessment
GI 86-10009
NESA 86-10009
January 1986
C o p y 3 1 1
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Secret
GI 86-10009
NESA 86-10009
January 1986
Directorate of Secret
Intelligence
Dependence on
Foreign Companies
The Libyan Oil Industry:
Strategic Resources Division, OGI,
This paper was prepared b Office of
Global Issues, and Office of Near
Eastern and South Asian Analysis. Comments and
queries are welcome and may be directed to the Chief.
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The Libyan Oil Industry:
Dependence on
Foreign Companies
Key Judgments Libya is heavily dependent on foreign oil companies for operating and
Information available maintaining its oil industry-the mainstay of the Libyan economy. Main-
as of 10 January 1986 taining steady earnings, however, has been a challenge to Tripoli, especial-
was used in this report.
ly in light of the soft oil market. As a result, Libyan oil revenues plunged
from $23 billion in 1980 to $11 billion in 1985. To protect its ability to gen-
erate revenues from oil, Tripoli is trying to:
? Maintain the oil industry's productive capacity by reversing the deterio-
ration of existing onshore oilfields and facilities caused by shortcomings
in maintenance and management.
? Develop new oilfield productive capacity principally through investments
in offshore projects. Leading these activities is Tripoli's major investment
in the offshore Bouri oilfield-located about 100 kilometers northwest of
Tripoli in the Mediterranean Sea.
? Induce foreign firms to explore for new oilfields, especially in western
Libya, by requiring producing companies to invest money in exploration
to ensure access to equity oil shares.
? Make investments in new downstream programs-including refining,
petrochemicals, and marketing.
To make progress on these goals, Tripoli has had to depend on foreign oil
companies and personnel, and we foresee that it will have to continue to do
so for the efficient long-term operation of its system. Foreign operating
partners are involved in about 80 percent of current Libyan production. In
particular, foreign companies and workers provide:
? Technical and management expertise in an industry that is short of
qualified personnel.
? Equipment to repair and upgrade the oilfields and facilities; Libya has no
oil equipment manufacturing capability.
? Capital to help finance a large portion of Tripoli's oil development
programs, including exploration. Libya has significantly drawn down its
financial reserves since 1981, as conditions in the oil market have
softened.
The heavy dependence of the Libyan oil industry on foreign companies
makes it vulnerable, at least in principle, to economic sanctions. Although
limited unilateral controls since 1982 on trade of US-origin goods and
technology have had some impact in limiting access to certain state-of-the-
art computer equipment, the widespread availability of petroleum equip-
ment has greatly softened the impact of US controls on Libya's petroleum
industry.
Secret
GI 86-10009
NESA 86-10009
January 1986
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We judge that the new, wider ranging unilateral economic sanctions by the
United States could have greater consequences for the Libyan petroleum
industry during the next few months if US production and service
companies pull out or are forced out of Libya abruptly:
? Production could drop modestly in the short term; a phased withdrawal
would have a smaller impact.
? Oil exports could fall temporarily by up to 20 percent or so from the cur-
rent level of 1.1 million barrels per day (b/d). US firms currently market
260,000 b/d-roughly 25 percent of Libyan exports-and alternate
export channels would have to be found, probably through price dis-
counts. If discounts end up exceeding price concessions previously given
the US firms, Tripoli will suffer some erosion in oil revenues.
? Tripoli will face delays replacing equipment and services previously
procured from the United States.
Over the longer term, the impact of US sanctions will tend to fade as time
passes unless our allies follow suit. Several factors, however, work against a
significant widening of the international scope of the sanctions. Many
countries hold large Libyan debts that can be repaid only through oil
exports. Some countries, especially in the Mediterranean area, also
probably fear Libyan reprisals for any actions in support of the US
sanctions. In response to the sanctions, Tripoli could offer the US oil
concessions to companies in countries such as Austria, West Germany,
Italy, France, Finland, Brazil, or even Romania. Alternatively, Libya may
nationalize the companies and operate them with foreign technical assis-
tance as happened after Exxon's withdrawal from Libya in 1981. Beyond
the marketing disruption, any short-term production problems in oilfields
currently involving US oil firms could be handled by other foreign
technicians and a small, but competent cadre of trained Libyan managers
once the necessary arrangements were made. A strong point in Libya's
favor is that most US companies provide services to Libya through their
West European subsidiaries, often using European personnel. The number
of US oilfield workers in Libya probably is no more than 500 to 800 and re-
placements could be recruited from a number of countries. Most oilfield
equipment and services are already obtained from non-US sources and
most denied US trade can be replaced.
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In reacting to the US sanctions, Qadhafi is unlikely to detain US citizens
or take them hostage. Following the initial imposition of sanctions in 1982,
for example, Qadhafi even helped expedite the departure of US citizens as
a propaganda ploy. Qadhafi probably believes any move against US
personnel would be used to justify a US military strike against Libya. The
Libyan leader may even offer lucrative incentives to retain the services of
select, highly skilled workers. Qadhafi probably will use economic sanc-
tions to marshal support for even greater domestic austerity and to blame
Washington for any further deterioration in economic conditions
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Key Judgments
Oil and the Libyan Economy
Dimensions of the Oil Industry
Crude Production Systems
2
Other Oil Industry Programs
4
Foreign Company Involvement in the Oil Industry
6
Maintaining Production and Revenues
10
Boosting Capacity
11
Exploration
11
How Qadhafi Will Play the Sanctions
15
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Figure 1
Libya: Oil Production and Revenues From Oil Exports, 1965-85
Oil Production
Million b/d
Oil Export Revenues
Billion US $
1965 70 75 80 81 82 83 84 85 0 1965 70 75 80 81 82 83 84 85
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The Libyan Oil Industry:
Dependence on
Foreign Companies
Oil and the Libyan Economy
Oil is the mainstay of the Libyan economy and the
principal source of Qadhafi's international influence.
Oil revenues totaling about $150 billion earned since
the revolution of 1969 have fueled his ambitious
development plans and foreign adventures. Petroleum
exports account for virtually all of Libya's foreign
exchange earnings, about half of GDP, and 70 percent
of government revenues. Because of soft oil market
conditions, however, real GDP per capita has declined
since 1980 by about 40 percent and overall economic
activity has fallen below the 1978 level. Oil revenues
plunged from a peak of $23 billion in 1980 to $11
billion in 1985 (figure 1), forcing Qadhafi to cut back
on his nonpetroleum development plans and to expel
several hundred thousand foreign workers. The gov-
ernment, however, has made sure that most basic
consumer goods are available-albeit at reduced
Table 1
The Recent Pattern of Libyan Oil Exports
Estimated
1985 Liftings
of Libyan
Oil a
(thousand b/d)
Libyan
Exports
(percent)
Purchaser's
Imports
(percent)
Total Libyan Exports
1,075
To OECD Countries a
843
78
7
Austria
18
2
9
West Germany 205 19 9
quality and with greater inconvenience,
Libya's major oil customers are the West European-
OECD countries, which purchase roughly 80 percent
of total Libyan oil exports (table 1). The degree of
dependence of individual West European countries on
Libyan oil varies widely, but no one country is
strategically dependent on Libyan oil, given the ready
availability of oil from other sources. West Germany
and Italy alone account for half of Libya's oil exports,
but get more than 80 percent of their oil imports from
other exporters. Communist countries, principally the
USSR in barter for Soviet arms, import another 15
percent of Libyan oil.
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a Compiled from industry reporting and published OECD statistics.
b Italy resells about half of its Libyan oil to third parties.
c The USSR accepts Libyan oil in barter for arms. Most of this oil
is shipped directly to Soviet customers in Western Europe-
primarily Finland. The Soviets also reexport about 20,000 b/d of
this oil to Yugoslavia, and a lesser amount to Bulgaria. The USSR
uses none of this oil domestically.
Dimensions of the Oil Industry
The Libyan system was developed primarily by US
companies during the 1960s, and production grew to
3.3 million b/d by 1970 (figure 1). Since reaching its
peak in the early 1970s, Libyan production has
steadily fallen to its present level of about 1.1 million
b/d, largely paralleling the dramatic cut in overall
OPEC oil production as a result of softening oil
market conditions. During the same period, produc-
tion capacity has fallen from more than 3 million b/d
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to about 1.6 million b/d because of inadequate oilfield
maintenance and a more conservative approach to
managing Libya's national petroleum resources.
Nonetheless, Libya's excess capacity represents about
20 percent of that outside the Persian Gulf. Moreover,
Libya's crude is premium quality-therefore easily
marketable-having high gravity and low sulfur con-
tent.
Foreign operating companies, such as Occidental,
AGIP, and the OASIS partners, form the backbone of
the Libyan crude oil industry. In total, fields involving
foreign participation account for about 80 percent of
current Libyan production. These companies not only
provide infusions of badly needed capital but also
bring to Libya essential technical skills and manageri-
? Occidental. The Occidental system-a joint US-
Italian (AGIP)-operated system, which produces
about 285,000 b/d-is currently the second-largest
producer. OMV of Austria recently bought 25
percent of Occidental's Libyan holdings. Occidental
administers its Libyan operations from the United
Kingdom. LNOC has controlling interest in both
Occidental's Libyan holdings and AGIP's Libyan
al experience.
Crude Production Systems
Libya's crude oil production comes from five essen-
tially separate export systems with a combined ex-
port-handling capacity of at least two times its current
1.1 million b/d production level The redun-
dancy and the dispersion of the oil system across
Libya with links to five separate terminals along the
coast increase flexibility and reduce the vulnerability
of Libyan exports to disruption: '
? OASIS. The OASIS system is the most important,
accounting for more than one-third of Libya's total
production, or about 400,000 b/d (table 2). The
system is owned and operated by the OASIS Oil
Company, a partnership of three US oil compa-
nies-Conoco, Marathon, and Amerada Hess-and
the Libyan National Oil Company (LNOC), which
? AGECO. The two government-controlled compa-
nies-Arab Gulf Exploration Company (AGECO)
and Umm al-Jawabi-own and operate the third-
largest system in Libya. Current production is about
40,000 b/d and 185,000 b/d from its western and
eastern fields, respectively. This system was origi-
nally developed by a partnership of British Petro-
leum and Nelson Bunker Hunt in the mid-1960s
following the discovery of the giant Sarir field in
east-central Libya. AGECO is used as LNOC's
swing produce of its si nificant underuti-
lized capacity.
we estimate AGECO's fields could pro-
duce about 450,000 b/d, primarily from the Sarir
oilfield.
reportedly employs about 2,500 people, of whom a
large proportion reportedly are from a number of
Western countries.
equity position in the Sirte system.
? Sirte. The Sirte system was built by Exxon but has
been operated by the government-controlled Sirte
Oil Company since Exxon pulled out of Libya in
late 1981. W. R. Grace-a US firm-has a small
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maintenance programs have
been neglected or delayed for years, and the Liby-
ans have had some difficulties running the system
? VEBA. This is the smallest producing system in
Libya with about 65,000 b/d production. It was
built and operated by Mobil until the company
suspended its Libyan production in 1982. VEBA
Oil-a Mobil partner-and Wintershall, both West
German firms, have small producing fields in this
system. The oilfields in this system are reportedly in
poor condition,
industry, which is currently on hold because of a lack
of revenues. These projects, combined with the poten-
tial development of a domestic gas grid, will result in
increased domestic gas consumption. With recover-
able reserves estimated by industry sources at 27
trillion cubic feet, LNOC is confident that domestic
requirements will be met for the next 30 years,
Libya is also trying to diversify through expanded
downstream activities. Libya has three domestic refin-
eries-all government owned-at Az Zawiyah
(120,000 b/d), Marsa al Burayqah (10,000 b/d), and
Tobruk (20,000 b/d), which meet its domestic con-
sumption of approximately 100,000 b/d. The Az
Zawiyah refiner and terminal complex handles im-
ports and limited exports of petroleum products. In
addition, in 1985 Libya started up its 220,000-b/d
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Other Oil Industry Programs
Although crude oil still provides the bulk of Libya's
earnings, the role of natural gas, refined products, and
petrochemicals is becoming increasingly important.
Libyan
longer term marketing strategy is to export refined
products and petrochemicals, rather than just crude,
and to utilize domestic natural gas resources.
Natural gas is becoming increasingly important as
both a revenue earner and a domestic fuel and
feedstock. Libya's LNG export facility at Marsa al
Burayqah-built in 1971-has a rated capacity of
about 3.4 billion cubic meters (bcm) per year, al-
though available capacity is less than 2.0 bcm because
of serious maintenance problems. Shutdown is possi-
ble at any time because of the poor condition of the
facility, according to the US Embassy in Rome.
Libya, however, recently embarked upon a modern-
ization program, and the plant could be at full
capacity by the end of 1985. Libya's nonpetroleum
development projects, including its steel plant and
aluminum smelter, will utilize natural gas for energy
as will the future expansion of Libya's petrochemical
export refinery at Ra's al Unuf.
We estimate that more than 50 percent of
this output is exported as fuel oil to Europe. In an
effort to further secure an outlet for its crude produc-
tion, Libyan interests have purchased Italy's 100,000-
b/d Tamoil refinery and the associated distribution
system of approximately 1,000 service stations, ac-
cording to the US Consulate in Milan.
The Libyan petrochemical industry began in 1981
with the startup of the first phase of the Marsa al
Burayqah petrochemical complex consisting of a
1,000-ton/day fertilizer plant, a 1,000-ton/day am-
monia plant, and a 1,000-ton/day methanol plant. A
major petrochemical complex is also being developed
at Ra's al Unuf with a 330,000-ton/year ethylene
plant nearing completion
Given the predominant role of oil sales in the Libyan
economy, the generation of revenues is the highest
priority goal of the country's oil industry. Indeed,
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Qadhafi reportedly has tasked LNOC to maximize
the country's income from crude and product sales by
improving the efficiency of oil production and by
sustaining the highest petroleum prices and export
levels bearable by the market. Despite interest in the
highest possible revenues, Tripoli has adhered reason-
ably closely to its OPEC oil production quota of 1
million b/d to help assure oil price--and earnings-
stability while maintaining its historic OPEC market
share. At the same time, Tripoli has tried to maintain
a reputation as a reliable oil supplier and diversified
its customer base to reduce the risk that its sales will
be curtailed.
In addition to the continuing primary goal of maxi-
mizing its oil revenues, Tripoli has established several
general development objectives that are guiding cur-
rent investment efforts
First among these goals is to maintain Libya's
productive capacity. Maximum oil productive capaci-
ty has fallen from more than 3 million b/d in the early
1970s to about 1.6 million b/d today, according to our
analysis. LNOC is specifically seeking to reverse the
deterioration of its oilfields caused by previous short-
comings in maintenance and management b both
LNOC and the Western oil or)eratorsJ
major investments in secondary recovery
systems, well-workovers, and pipeline repairs will be
required to achieve this objective. Maintaining oil
productive capacity substantially above production
gives Tripoli the option to increase production to
maintain oil export revenues in an oil price decline or
to maximize revenues caused by oil supply disruptions
elsewhere.
To maintain overall productive capacity, LNOC is
also making a major effort to develop new oilfields.
Tripoli's major investment in the offshore Bouri oil-
field leads these activities. We expect this ongoing
development effort-by AGIP of Italy-will add at
least 75,000 b/d in new oil productive capacity by
1990. Less costly development efforts call for re-
assessment of the oil potential in Libya's existin
Management of Libyan Oil Policy
Mu'ammar
Qadhafi' personally sets the guidelines for the Libyan
National Oil Company. Acting Secretary of Petro-
leum, Fawzi al-Shakshuki, is Qadh's primary
policy assistant. Aside from Shakshuki's role, the
Ministry of Petroleum does not play a major role in
policy formation. LNOC also reportedly has no direct
participation in the design of the country's oil policy
and acts only to implement oil industry guidelines.
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he quality of LNOC top 25X1
management is fairly good and that the company
takes a businesslike, pragmatic approach to opera- 25X1
tions. Top managers have either been trained abroad 25X1
and are experienced in the oil industry or are knowl- 25X1
edgeable businessmen with access to foreign trained
advisers and personnel within LNOC's structure. The
chairman of LNOC is Abdallah al Badri,
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Exploration for new oilfields also plays a role in
Tripoli's oil program. New onshore and offshore areas
can be explored without incurring heavy investment
New downstream initiatives-into refining, petro-
chemicals, and marketing-are largely being deferred
in the continuing soft oil market except for the recent
purchase of Italy's Tamoil operation. LNOC is also
trying to expand sales of products from its new
220,000-b/d refinery at Ra's al Unuf. Work is also
proceeding on a domestic natural gas network grid to
make more gas available for use as a fuel and possible
feedstock for the planned expansion of its petrochemi-
cal industry.
The objectives set by Qadhafi for the Libyan oil
industry are ambitious, especially in light of the soft
oil market. There is clearly a shortage of financial
reserves to make all the necessary investments. F_
Besides serious financial constraints, contin-
ued efforts to Libyanize the oil industry work force
have hampered progress in numerous areas.
some oil program initiatives.
personnel have been lost, reducing the effectiveness of
decisionmaking and weakening implementation of
some skilled foreign midlevel
Foreign Company Involvement in the Oil Industry
Despite Tripoli's efforts to Libyanize the oil sector,
the industry is dominated by the presence of foreign
companies and workers (table 3). Their presence is
dictated by three key Libyan oil industry needs:
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Table 3
Foreign Companies Operating in Libya's Oil Industry
Production Oilfield Exploration Construction Equipment
Services Services and Engineering Sales
Combustion x
Engineering x
Weatherford x
International
EMH x Single point mooring
Forex x x Neptune Drilling
services
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Table 3
Foreign Companies Operating in Libya's Oil Industry (continued)
Production
Oilfield
Exploration
Construction
Equipment
Services
Services
and Engineering
Sales
Sante Fe International x
Corp.
Communication and
computer gear
Hyundai x x Topside
manufacturer
Samsung x x Oil storage tanks,
water injection
x Oilfield pumps,
turbines
x Oilfield pumps. tur-
bines, electric gear
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Table 3 (continued)
Production
Oilfield
Exploration
Construction
Equipment
Services
Services
and Engineering
Sales
Imperial Chemical
Industries (ICI)
Motherwell Bridge
Constructors
x Project manager of
Bouri field
x Petrochemical plant
Kloeckner-
Humboldt-Deutz
Tsvetmetpromehksport
(USSR)
x Gas pipeline
construction
? The need for skilled technicians and managers to
handle the more complex operations of the oil
industry. there are
shortages o qualified personnel at all levels in the
Libyan oil industry,
capability and must import all equipment-from
steel tubulars to seismic processing computers. For-
eign service companies are required for pipeline 25X1
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? The need for foreign equipment and services to
repair and upgrade the Libyan oil infrastructure.
Libya has no domestic oil equipment manufacturing
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? The need for foreign capital to carry out Tripoli's oil
development programs. The drawdown in Libyan
foreign reserves has necessitated more foreign equi-
ty or barter arrangements that minimize Libyan
capital outflows.
Maintaining Production and Revenues
Tripoli is fully aware of its reliance on foreign oil
companies, service companies, and personnel for the
efficient operation of its oil system and has tried to
make working in Libya attractive to foreign compa-
nies and personnel. The government has regularly
adjusted equity margins for its foreign oil equity
partners to maintain their production and presence in
Libya. Foreign equity participation and barter ar-
rangements are generally viewed by the foreign com-
panies as particularly profitable investments,
All of this has led foreign oil
production, service, engineering, and equipment com-
panies to participate actively in the Libyan oil pro-
gram despite political strains in recent years.
Besides oilfield expertise and capital investment, oper-
ating companies provide an assured crude oil sales
outlet. We estimate foreign companies in Libya cur-
rently lift about one-third of Libya's production, the
exact amount depending upon buyback arrangements
(table 4). In a period of market surplus, assured crude
oil markets are extremely important to maintaining
Libyan revenues. Operating companies are assessed
stiff financial penalties if they fail to lift their equity
shares.
All Libyan operating companies use equipment and
service companies from the United States, Canada,
and Western and Eastern Europe for specialized
tasks, including well maintenance and workover tasks,
artificial lift equipment, installation, and pipeline
inspection services. Dowell Schlumberger of France
performs electric and wire line logging, cementing,
and chemical operations. Italian, French, and US
companies have drilling rigs at work engaged in well-
workovers. In particular, US companies perform criti-
cal downhole equipment and maintenance and pipe-
line inspection services.
Table 4
Equity Liftings for Foreign Companies
Crude Equity
Liftings
(thousand b/d)
which vary from quarter to quarter.
firms are lifting about 260,000 b/d.
b Elf is no longer producing oil in Libya.
These companies are either entirely or partially government
owned.
The role of overseas subsidiaries of US companies in
serving Libyan needs is particularly complex. Most
US manufacturers of oilfield equipment as well as US
engineering and service companies have established
foreign operations to avail themselves of lower manu-
facturing costs and trade and tax advantages and as a
means of avoiding US export and trade restrictions. A
survey of 16 major US oilfield equipment suppliers
operating 230 facilities worldwide placed 55 percent
of the manufacturing facilities in North America, 18
percent in Europe, 16 percent in South America, and
the remaining 11 percent in Africa and the Middle
East. Consequently, most oilfield equipment, such as
downhole gear-like packers and seals; drilling equip-
ment, such as drill bits; and wellhead equipment, such
as blowout preventers and christmas trees, can be
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procured from US manufacturing subsidiaries
throughout the world, but particularly in Western
Europe. These companies operate under the laws of
their host countries and employ primarily local per-
sonnel. Consequently, while US companies may be
the ultimate source of certain petroleum equipment
and services used in the Libyan oil industry, the
actual equipment and services may be provided by a
foreign subsidiary, especially West European.
Expatriates comprise up to 40 percent of the work
force of Libya's operating companies,
Based on our estimates and
press reporting, approximately 1,000 to 1,200 US
citizens are now living in Libya along with 1,500
Canadians, 5,000 British, 1,500 West Germans, 1,200
French, and 16,000 Italians. Although, we do not
have a breakdown by occupation, we believe many of
these individuals have petroleum-related jobs. Other
foreign personnel include Pakistani, Indian, Philip-
pine, South Korean, Maltese, and Dutch workers.
Westerners
are hired as technicians (machinists and computer
specialists), engineers, drilling supervisors, oil pipeline
and terminal operators; and Asians are hired for rig
operations and as construction contractors and work-
ers. In addition, LNOC has about 100 US, Canadian,
British, and Iranian consultants who act as geologists,
As of December 1985, the
expulsion of expatriate workers from Libya had not
affected skilled foreign workers in the petroleum
industry,
The quality of foreign personnel has improved be-
cause of the worldwide oil slump and the subsequent
availability of talent hungry for work,
LNOC also tries to make
living conditions as pleasant as possible for expatriate
Boosting Capacity
Besides maintaining the productive capacity of exist-
ing oilfields, foreign producing companies operating in
Libya are involved in the development of new oil-
fields. Producing companies provide the capital and
development plans, and foreign oil service companies
carry out the actual development work. The most
important new oilfield project is the offshore Bouri
field, the largest oilfield yet developed in the Mediter-
ranean. The Italian oil company AGIP is developing
the field near the Tunisian border north of Tripoli at
an estimated cost of more than $2 billion.
the project is being financed 81 percent
by LNOC and 19 percent by AGIP. Plans call for two
drilling and production platforms to be set in 165
meters of water and the drilling of 50 wells. Recover-
able reserves are estimated at 500 million barrels.
First-phase production is expected to flow into moored
tankers at the rate of 50,000 to 75,000 b/d in late
AGIP estimates capacity at 75,000 b/d because of a
higher-than-expected gas content in the crude.
The Italian Government is reportedly involved in this
project primarily because most of the planned con-
struction work will be carried out by Italian firms,
and it will secure a 20-percent share of the oil
produced. Besides Italian companies, French, British,
Norwegian, and Korean firms also are participating
in this scheme. The entire project is being developed
without US-built equipment or services
Exploration
Although the Libyan operating companies of AGECO
and Sirte have the most active exploration programs,
numerous foreign companies are also involved. We
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estimate LNOC has budgeted about $610 million for
oil exploration in 1986, representing a 10-percent
increase over the 1985 budget. The key players
include not only foreign producing companies, such as
OASIS, Occidental, and AGIP, but also companies
holding undeveloped concessions in Libya,
Qadhafi is determined to develop the oil potential of
western Libya near the Algerian border and is encour-
aging foreign firms to explore in that region,
Downstream Activities
Libyan efforts to develop the downstream sector of its
petroleum industry have been sharply curtailed by the
severe drop in Libyan oil revenues and the excess
capacity in the worldwide refinery and petrochemical
upon the uniqueness and range of the denied goods
and services and the international scope of the sanc-
tions imposed.
complex at Ra's al Unuf.
Experience With Limited Controls
The United States has maintained since 1982 unilat-
eral controls on exports or reexports to Libya of US-
origin goods and technology. Although far short of
outright denial of trade through sanctions, these
measures allowed the United States to restrict the
flow of certain goods and services to Libya. The
controls required a validated license from the Depart-
ment of Commerce for the export to Libya of virtually
all US-origin equipment and technology other than
food and medical supplies. Because of the widespread
foreign availability of most petroleum equipment,'
licenses were generally approved for most petroleum
equipment, except for those items that had dual
civilian-military uses or would contribute to the devel-
opment of the refining and petrochemical processing
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industries. Most important
a second export refinery of 220,000 b/d at
Misratah has been put on hold until financial and
market conditions improve, as have the second-phase
developments of the petrochemical complexes at
Marsa al Burayqah and Ra's al Unuf. Libya's domes-
tic natural gas development plans have likewise been
affected by current conditions. If Libya's financial
picture improves, all of these downstream plans will
be contingent on the availability of foreign equipment
and services.
The heavy dependence of the Libyan oil industry on
foreign companies makes it extremely vulnerable, in
principle, to economic sanctions. As in all such cases,
however, the eventual impact of sanctions depends
The most noticeable effect of US export controls on
Libya's petroleum industry was the inability to ac-
quire state-of-the-art computer equipment,
In a few areas, such as
array processors, the lack of access handicapped the
oil industry's ability to process large quantities of
seismic data efficiently and effectively,
In other areas, the effect was limited
to the increased time and cost spent in acquiring US-
embargoed equipment through middlemen. Except for
computer equipment, the Libyans were able to ac-
quire the full range of petroleum equipment necessary
to maintain capacity from non-US manufacturers,
Sanctions in the Near Term
The new, wider ranging economic sanctions an-
nounced by the United States go well beyond the
trade controls imposed in 1982. The US sanctions will
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be disruptive to the Libyan petroleum industry for
several months at least, if the US producing and
service companies pull out or are forced out of Libya.
The abrupt withdrawal of these US companies could
result in a modest short-term drop in Libyan oil
production in our opinion; a phased withdrawal would
have a smaller impact. Any resulting production
decline, however, would most likely be temporary and
inflict limited hardship on the government. The num-
ber of US oilfield workers in Libya, for example, is no
more than 500 to 800. The Libyans could rely on
domestic personnel and workers from Western Eu-
rope, Canada, and the Soviet Bloc for assistance.
Applications by Canadians exceeded demand by a
ratio of 4 to 1 following the withdrawal of US
personnel in 1982, a situation that probably would
still prevail. Much of the foreign labor force of US oil
firms operating in Libya probably could be persuaded
to remain. Moreover, most US companies provide
services to Libya through their West European sub-
sidiaries, often using European personnel, so they
would be immune to the US sanctions. Occidental
might be able to continue its Libyan production
operations because they are administered from the
United Kingdom.
Although production might hold up fairly well, the
departure of US operating companies would compli-
cate the marketing of Libya's crude. Prior to the
sanctions, US companies received a margin of about
$2 per barrel for lifting as much as 200,000 b/d of
Libyan crude-about 20 percent of current output-
as compensation for their equity holdings. The compa-
nies then either processed the crude in their own
downstream operations outside of Libya or sold the
crude on the spot market. As for Tripoli, it must now
find buyers to replace the assured offtake of US
companies-a move that will probably require price
discounts to attract new customers away from existing
arrangements. Even if sufficient new buyers are found
for the equity oil, the required price discount may
exceed the presanctions equity margin, eroding
Tripoli's oil revenues somewhat.
Trends over the past few years have worked to lessen
the impact of the removal of US petroleum equipment
companies from Libya. Within that period, European
and Asian equipment companies-including US sub-
sidiaries-have gained a dominant position in Libya's
petroleum goods markets. Several subsidiaries already
are supplying the Libyans with many of the standard
items usually provided in the past by US-based firms.
In addition, Italian, French, and British companies
working in Libya probably are easily replacing stan-
dard supply items, such as drill pipe, needed by the
Libyans. Although replacement parts for US-manu-
factured pumps, compressors, and other equipment
might be harder to obtain, suitable substitutes proba-
bly can be procured from European subsidiaries of US
firms or the USSR. If these efforts failed, the Libyans
could replace the equipment at greater expense with
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Although near-term production and revenues might
see some temporary erosion as a result of US sanc-
tions, Tripoli's development, exploration, and down-
stream activities seem more insulated. The major
push offshore to develop the Bouri field is being
overseen by AGIP, an Italian firm, with John Brown
Engineering, a British firm, as project manager.
Other firms from Italy, France, Norway, and South 25X1
Korea are providing services and equipment. Firms
from Italy, France, Brazil, Bulgaria, Romania, West
Germany, the Netherlands, and the United Kingdom
are heavily involved in exploration activity along with
US firms and could step in quickly to fill any gap. The
downstream refinery and petrochemical activities are
primarily the domain of construction and equipment
companies from Italy, West Germany, the United
Kingdom, and Japan.
Longer Term Prospects
The longer term impacts of the US sanctions depend
primarily on the extent to which other countries
follow suit. Among the allies, the United Kingdom
has few trade and financial ties to Libya, and those
that exist are of little importance to London. Many
factors, however, work against a significant widening
of the international scope of the sanctions. Several
countries hold large Libyan debts that can be repaid
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only through oil exports. Many countries also see the
potential of gaining large construction contracts in
Libya and do not want to endanger their prospects.
Some countries, especially in the Mediterranean area,
probably also fear Libyan reprisals for any actions
taken in support of the US sanctions:
? France in early 1983 reportedly agreed to augment
its imports of Libyan crude in return for Libyan
promises to consider French companies in public
works contracts and to pay past-due bills owed
French exporters-which probably total about $100
million. Libya supplies about 3 percent of France's
petroleum needs. Although Qadhafi's movement
into Chad has caused Paris to curtail military
shipments to Libya, imports of crude oil have not
been reduced much during the past two years.
? Italy is Libya's largest trading partner in Europe,
and Italian officials have placed considerable impor-
tance on trade ties in justifying Rome's mainte-
nance of normal relations with Tripoli. Libya's
serious arrearage problem-$800 million-with
Rome, however, is clouding this relationship. Qa-
dhafi has linked the payment of arrearages to
increased Italian imports of Libyan oil and gas.
Italy also has a substantial stake in the development
of Libya's large offshore oil resources.
While economics is at the heart of the relationship,
political and security aspects have gained promi-
nence in recent years. Concern about Libya's ability
to threaten Italian interests has increased in Rome,
and we believe that Qadhafi plays on these fears in
his effort to intimidate the Italians. Qadhafi repeat-
edly has threatened to attack military bases in Sicily
and elsewhere if they are used to stage a strike
against Libya. The significant economic ties and
heightened security concerns probably will make
Rome reluctant to reduce imports of Libyan oil, or
? West Germany's economic ties to Libya are signifi-
cant, and Bonn would resist measures jeopardizing
them. Libyan oil accounts for 9 percent of West
Germany's needs, and, barring Libyan outrages,
Bonn probably will be unwilling to reduce the
amount.
? Greece relies on Libya for about one-fourth of its oil
imports and probably would be unwilling to de-
crease this trade in the near term. Athens enjoys its
trading relationship with Tripoli because Libya is
one of the few countries willing to engage in barter
arrangements with Greece.
? South Korea has significant trade ties to Libya and
the Dong Ah company has the largest share-$3.3
billion out of $7 billion-of Qadhafi's Great Man-
ably would be unwilling to reduce its oil imports or
abandon its large engineering and construction com-
mitment.
? Turkey has experienced significant problems in
gaining Tripoli's cooperation in meeting long-
overdue commercial arrearages to domestic firms.
Turkey's oil imports from Libya are linked to
Tripoli's repayment of these debts, and they are
unlikely to be reduced any time soon.
? Austria takes Libyan oil as a means of diversifying
petroleum supplies. A growing interest in direct
participation in Libya's petroleum sector and iron
and steel industry weigh against Austria being
persuaded to reduce its purchases of Tripoli's crude
oil in the near term.
Given time, Tripoli could offer the US oil concessions
to non-US oil companies under terms that would be
enticing even in the present soft oil market. Alterna-
tively, Libya could choose to nationalize the assets of
US companies and operate them with foreign techni-
cal assistance as happened after Exxon's withdrawal
from Libya in 1981. With the present glut in the
petroleum equipment and services markets, Libya
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would probably have little trouble arranging, in the
long run, to operate without the involvement of US
companies, if the economic sanctions remained
unilateral.
On the other hand, a broader set of sanctions involv-
ing, for example, the NATO countries, including
France, would impose considerable, long-lasting dam-
age on the Libyan oil industry:
? About half of present revenues would be lost if not
replaced through adjustments in trade pattern in-
volving the international oil market as a whole.
? Companies from South Korea, Japan, Brazil, and
the Soviet Bloc might replace the services and
equipment lost from NATO countries but at a
significant overall reduction in effectiveness. This
cost would be evident increasingly over time
through increased physical deterioration of the pro-
duction system, a fall in maximum sustainable
capacity (MSC) as production declines outpaced
new development projects, and decreased replace-
ment of reserves through exploration.
We believe an effective allied-wide economic boycott
of Libya would succeed only if Italy is a major
participant. Besides American companies, the Italian
oil company AGIP has the largest equity stake in the
Libyan oil industry and gains most from Libyan oil
exports. Moreover, Italian investment in the Bouri
offshore oil development program is the largest ongo-
ing investment activity in the petroleum sector by any
foreign company. Even if Rome acts fully in concert
with the United States, the likelihood that other
European governments will follow suit is probably still
small.
How Qadhafi Will Play the Sanctions
Qadhafi probably will use economic reprisals to mar-
shal support for even greater domestic austerity and
to blame Washington for any further deterioration in
economic conditions. Qadhafi is unlikely, however, to
detain US citizens or to take them hostage. Following
the imposition of sanctions in 1982, for example,
Qadhafi even helped expedite the departure of US
citizens as a propaganda ploy. Qadhafi probably
believes any move against US personnel would be
used to justify a US military strike against Libya,
which he is probably reluctant to encourage. Qadhafi
may even offer lucrative incentives to regain the
services of select highly skilled workers.
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